The sweeping $1.35 trillion tax bill President Bush signed into
law includes measures designed to make retirement plans simpler for
entrepreneurs to sponsor. The question is, Will the changes bring
entrepreneurs flocking to the plans to help their employees?

The answer: not necessarily. Small-business owners, put off by
prohibitive costs and complicated administrative tasks, have
traditionally been far less likely than CEOs of larger companies to
set up retirement plans. Rep. Ben Cardin (D-MD), who co-sponsored
the House pension reform bill, estimated that among companies with
fewer than 100 employees, as many as 80 percent of workers have no
pension or retirement plan (compared to just 25 percent for large
companies).

As experts are quick to point out, the absence of these savings
options has put small-business owners at a competitive disadvantage
in the war for talent. The new law aims to remedy that by offering
some extra incentives to entrepreneurs considering sponsoring
plans, but it's not clear whether the enhancements address the
problems.

Peddling Peanuts

First, the legislation offers a tax credit for new plans
established in 2002 and beyond by owners of businesses with 100 or
fewer employees. The credit would apply to 50 percent of the first
$1,000 in start-up expenses for the first three years after the
start of the plan. While the offer does address the cost issue, not
everybody is impressed with the dollar figure. "That's
peanuts," observes Don Buckner, 39, founder of Okahumpka,
Florida-based American Manufacturing and Machine Inc. and president
of its main subsidiary, Vac-Tron Equipment, which makes industrial
vacuum products. "I wouldn't even fill out the
paperwork." The $22 million company doesn't offer its 50
employees a retirement plan, but Buckner says that particular perk
isn't a factor in attracting talent in his region.
"It's not expected," he says.

Buckner isn't alone in his thinking. According to the 2001
"Small Employer Retirement Survey" from the Employee
Benefit Research Institute (EBRI), a nonpartisan public policy
research organization, the No. 1 reason for not sponsoring
plans-with 19 percent of entrepreneurs citing it-is that their
employees wouldn't be interested, preferring the compensation
in additional wages and other benefits.

The legislation's gradual increase in contribution limits
for owners and employees for most plans is one way to make the
plans more attractive and appealing, says Eva Spenny, director of
retail retirement plans for American Express Financial Advisors.
But EBRI president and CEO Dallas Salisbury cites the fact that
roughly one-fifth of federal workers don't contribute to a
401(k) plan that offers 5 percent matching. "It's one of
the richest plans in the country, and they still can't get that
20 percent of people to participate," he says.

The new law also doesn't address the No. 2 concern, which
was cited by
18 percent of EBRI's nonsponsoring respondents: that revenue is
too uncertain to commit to a plan. Another 15 percent say a large
percentage of their work force is seasonal, part time or
high-turnover. "So what you end up with is the vast majority
of entrepreneurial firms that don't sponsor any kind of
plan," says Salisbury, "and essentially they say it's
for reasons that have nothing to do with the law."

Lightening Up

For entrepreneurs who have held back only because of
administration headaches, the reform does try to make the task
easier on the back end by simplifying the "top-heavy"
rules. At present, if a plan is top-heavy (key employees receive an
excessive portion of the plan's benefits), it has to satisfy
special vesting schedules and make minimum contributions for nonkey
employees. "Those rules don't go away [with the new
law]," says Robert Corcoran, vice president at Fidelity
Investments Retail Retirement Service, "but they're
simpler."

One roadblock yet to be addressed is educating entrepreneurs
about their options, says Spenny. For example, a lot of
entrepreneurs think they have to start with a 401(k), she says, but
in fact, there are a wide variety of plans at varying cost levels.
Because small businesses tend to transition as they grow in terms
of their plan needs, they should start with something small-SEPs,
SIMPLEs and Keoghs-and then segue to 401(k)s later.
"[Entrepreneurs] think they don't have the
resources," she says, "but until they really sit down and
look at what their goals are and what resources are required, they
just don't know."

C.J. Prince is a New York City writer who specializes in
business topics and the executive editor of Chief Executive
magazine.

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